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Research Roundup: Entrepreneurship, Clusters, Competition, and more

Research Roundup: Entrepreneurship, Clusters, Competition, and more

If you only have time for one article from today’s Research Roundup—and especially if you don’t have the patience for something technical—make it the framework for thinking about entrepreneurship laid out by Henrekson and Sanandaji in the introductory chapter to Institutional Entrepreneurship (2011).  Here the editors set up a taxonomy that hinges on whether entrepreneurial activities actually create wealth (are “productive”), as well as whether they adhere to, evade, or alter prevailing institutions.  The definitions are rich enough to classify Washington insiders (including some who might frequent this blog) as “entrepreneurs” whose innovations include not business models but “altering” political contributions (read: lobbying) for destructive rent-seeking or broad social benefit.  Hanrekson and Sanandaji illustrate their framework with a diverse group of articles discussing archetypical “productive abiding entrepreneurs” (think Silicon Valley), the oligarchs of Russia, and even the Sicilian mafia.  We look forward to the release of their volume.

Another paper on entrepreneurship, from Temple’s Delgado, Harvard’s Porter, and Northwestern’s Stern, dives into the impact of geographic/industry clusters on the level of new business creation and start-up employment.  And a wealth of papers—ranging from the highly theoretical to a concrete discussion of the Oracle/Sun decision in the European Union—tackle competition.  Click through to the full post to see the set of abstracts on these and other topics.

Innovation and Entrepreneurship

Mercedes Delgado, Michael E. Porter, Scott Stern

“This paper examines the role of regional clusters in regional entrepreneurship. We focus on the distinct influences of convergence and agglomeration on growth in the number of start-up firms as well as in employment in these new firms in a given region-industry. While reversion to the mean and diminishing returns to entrepreneurship at the region-industry level can result in a convergence effect, the presence of complementary economic activity creates externalities that enhance incentives and reduce barriers for new business creation. Clusters are a particularly important way through which location-based complementarities are realized. The empirical analysis uses a novel panel dataset from the Longitudinal Business Database of the Census Bureau and the U.S. Cluster Mapping Project (Porter, 2003). Using this dataset, there is significant evidence of the positive impact of clusters on entrepreneurship. After controlling for convergence in start-up activity at the region-industry level, industries located in regions with strong clusters (i.e. a large presence of other related industries) experience higher growth in new business formation and start-up employment. Strong clusters are also associated with the formation of new establishments of existing firms, thus influencing the location decision of multiestablishment firms. Finally, strong clusters contribute to start-up firm survival.”

Magnus Henrekson, Tino Sanandaji

“In this introductory chapter to a collective volume, we build on Baumol’s (1990) framework to categorize, catalog, and classify the budding research field that explores the interplay between institutions and entrepreneurship. Institutions channel entrepreneurial supply into productive or unproductive activities, which likely accounts for a great deal of the disparate economic development of nations. What’s more, entrepreneurship is not only influenced by institutions – entrepreneurs often shape institutions themselves. Entrepreneurship abiding by existing institutions is occasionally disruptive enough to challenge the foundations of prevailing institutions. Entrepreneurs also have the opportunity to evade institutions, which tends to undermine the effectiveness of the institutions in question, or cause them to change for the better. Lastly, entrepreneurs can directly alter institutions through innovative political entrepreneurship. Similar to business entrepreneurship, innovative political activity can be either productive or unproductive, depending on the entrepreneurs’ incentives.”

Competition and Antitrust

Yan Liu, Guang-Zhen Sun

“We develop a framework, extending the conventional duopoly model by replacing the Hotelling line with a simplex in high-dimension spaces, to study the competition and access regulation of multiple networks. We first characterize the competitive equilibrium when the substitutabilities of the networks are not too high, or the access charges are nearly cost-based. We then analyze how the equilibrium market shares respond to marginal variations in the access charges under various regimes of access regulation, and thereby examine the efficiency implications of such regulation regimes. In particular, we analyze the asymmetric scenario in which some networks are incumbent and some are entrants. It is shown that some existing results of the duopoly do not extend to a multi-firm setting, largely because regulation of multiple networks is structurally far richer.”

Julienne Liang

“This article proposes a duopoly model based on a model initially introduced by Shubik and Levitan to analyze the competition based on mobility and data volume between fixed and mobile broadband access. By the description of asymmetrical characteristics of fixed and mobile broadband offers and demand functions, Nash equilibrium can be derived through a game where both firms compete in price. This simple model is a first attempt in addressing the issue of partial fixed-mobile substitution. It allows modeling some effects of price interdependence between fixed and mobile markets and is used in a version of the “hypothetical monopolist” test (or SSNIP, Small but Significant and Non-transitory Increase in Price). The comparisons in terms of social welfare between fixed-mobile intermodal competition, fixed perfect competition and mobile perfect competition indicate that the fixed-mobile intermodal competition leads to a higher level of social welfare.”

Simonetta Vezzoso

“In Europe, the merger between Oracle and Sun raised a series of substantial competition concerns, especially related to the acquisition by Oracle of MySQL, an open source business, and its impact on the database market. In the end, the acquisition was unconditionally cleared by the Commission. The open source nature of MySQL played a decisive role in the competition assessment of the merger conducted by the European competition authority according to the “significant impediment to effective competition” legal test. In this Article we will review the Commission’s decision with the specific aim of determining to what extent the open source nature of MySQL’s business model actually affected the scrutiny of Sun’s acquisition by Oracle under the relevant test. In particular, it will be questioned whether Oracle’s public announcement concerning its future behaviour on the database and related markets can be expected to duly address the concerns voiced by the Commission in the course of the merger proceedings. We will conclude that that Judge Easterbrook’s much quoted conclusion that – ®he GPL and open-source software have nothing to fear from the antitrust laws – may possibly need some qualification.”

Ramon Casadesus-Masanell, Hanna Halaburda

“We present a theory for why it might be rational for a platform to limit the number of applications available on it. Our model is based on the observation that even if users prefer application variety, applications often also exhibit direct network effects. When there are direct network effects, users prefer to consume the same applications to benefit from consumption complementarities. We show that the combination of preference for variety and consumption complementarities gives rise to (i) a commons problem (users have an incentive to consume more applications than the social optimum to better satisfy their preference for variety); (ii) an equilibrium selection problem (consumption complementarities often lead to multiple equilibria); and (iii) a coordination problem (lacking perfect foresight, it is unlikely that users will end up buying the same set of applications). The analysis shows that the platform can resolve these problems by limiting the number of applications available. By limiting choice, the platform may create new equilibria (including the socially efficient allocation), destroy Pareto-dominated equilibria, and reduce the severity of the coordination problem faced by users.”

Daron Acemoglu, Dan Vu Cao

“We extend the basic Schumpeterian endogenous growth model by allowing incumbents to undertake innovations to improve their products, while entrants engage in more “radical” innovations to replace incumbents. Our model provides a tractable framework for the analysis of growth driven by both entry of new firms and productivity improvements by continuing firms. Unlike in the basic Schumpeterian models, subsidies to potential entrants might decrease economic growth because they discourage productivity improvements by incumbents in response to reduced entry, which may outweigh the positive effect of greater creative destruction. As the model features entry of new firms and expansion and exit of existing firms, it also generates a non-degenerate equilibrium firm size distribution. We show that when there is also costly imitation preventing any sector from falling too far below the average, the stationary firm size distribution is Pareto with an exponent approximately equal to one (the so-called “Zipf” distribution”).”

Vineet Kumar, Brett R. Gordon, Kannan Srinivasan

“Commercial open source software (COSS) products – privately developed software based on publicly available source code – represent a rapidly growing, multi-billion dollar market. A unique aspect of competition in the COSS market is that many open source licenses require firms to make certain enhancements public, creating an incentive for firms to free-ride on the contributions of others. This practice raises a number of puzzling issues. First, why should a firm further develop a product if competitors can freely appropriate these contributions? Second, how does a market based on free-riding produce products that effectively compete with similar products from proprietary software firms? Third, from a public policy perspective, does the mandatory sharing of enhancements raise or lower consumer surplus? We develop a two-sided model of competition between COSS firms to address these issues. Our model consists of (1) two firms competing in a vertically differentiated market, where product quality is a mix of public and private components, and (2) a market for developers whom firms hire after observing signals of their contributions to open source. We demonstrate that free-riding behavior is supported in equilibrium, that a COSS market can produce better products than a traditional software market, and that free-riding can actually increase profits and consumer surplus.”

Broadband

Jed Kolko

“I find a positive relationship between broadband expansion and local economic growth. This relationship is stronger in industries that rely more on information technology and in areas with lower population densities. Instrumenting for broadband expansion with slope of terrain leans in the direction of a causal relationship, though not definitively. The economic benefits of broadband expansion for local residents appear to be limited. Broadband expansion is associated with population growth as well as employment growth, and both the average wage and the employment rate – the share of working-age adults that is employed – are unaffected by broadband expansion. Furthermore, expanding broadband availability does not change the prevalence of telecommuting or other home-based work. Like other place-based policies, expanding broadband availability could raise property values and the local tax base, but without more direct benefits for residents in the form of higher wages or improved access to jobs.”

Tech and Macroeconomics

Diego Comin, Bart Hobijn

“In the aftermath of World War II, the world’s economies exhibited very different rates of economic recovery. We provide evidence that those countries that caught up the most with the U.S. in the postwar period are those that also saw an acceleration in the speed of adoption of new technologies. This acceleration is correlated with the incidence of U.S. economic aid and technical assistance in the same period. We interpret this as supportive of the interpretation that technology transfers from the U.S. to Western European countries and Japan were an important factor in driving growth in these recipient countries during the postwar decades.”

James P. LeSage, Manfred M. Fischer

“This paper explores the contribution of knowledge capital to total factor productivity differences among regions within a regression framework. We provide an econometric derivation of the relationship and show that the presence of latent/unobservable regional knowledge capital leads to a model relationship that includes both spatial and technological dependence. This model specification accounts for both spatial and technological dependence between regions, which allows us to quantify spillover impacts arising from both types of interaction. Sample data on 198 NUTS-2 regions spanning the period from 1997 to 2002 was used to empirically test the model, to measure both direct and indirect effects of knowledge capital on regional total factor productivity, and to assess the relative importance of knowledge spillovers from spatial versus technological proximity.”

Henry R. Hyatt, Sang V. Nguyen

“Numerous studies have documented a positive association between information technology (IT) investments and business- and establishment-level productivity, but these studies usually pay sole or disproportionate attention to small- or medium-sized entities. In this paper, we revisit the evidence for manufacturing plants presented in Atrostic and Nguyen (2005) and show that the positive relationship between computer networks and labor productivity is only found among small- and medium-sized plants. Indeed, for larger plants the relationship is negative, and employment-weighted estimates indicate computer networks have a negative relationship with the productivity of employees, on average. These findings indicate that computer network investments may have an ambiguous relationship with aggregate labor productivity growth.”

Health IT

Nicolas P. Terry

This article examines the promise of the Health Information Technology for Economic and Clinical Health Act to reduce or eliminate the market failures that have impeded the adoption of electronic health records. Specifically, the article considers a key provision of the statute, a condition for receiving EHR subsidy funds: meaningful use. This deceptively simple requirement, that a health care provider must make “meaningful use of certified EHR technology,” has become both the regulatory core and the talisman for the next decade’s implementation of health information technology. The article describes the background to the subsidy program and examines the specifics of the “Certification” and “Meaningful Use” regulations that have followed. The article concludes by taking a broader view of Meaningful Use and relating it to the concept of more fundamental health care reform.”

Privacy and Security

Peter J. Phillips

“Cyber-crime and cyber-terrorism represent potential threats to national security. The mean-variance efficient choice set from which the expected utility maximising cyber-criminal will choose is dominated by denial of service attacks, embezzlement, theft of intellectual property and the multiplicity of other types of crime such as spyware, adware, hacking and phishing.”

Dana Lesemann

“This Article addresses the legal, technological, and policy issues surrounding U.S. data breach notification statutes and recommends steps that state and federal regulatory agencies should take to improve and harmonize those statutes. Part I of this Article provides background on the data breaches that gave rise to the enactment of notification statutes. Part II addresses the varying definitions of “personal information” in the state statutes – the data that is protected by the statute and whose breach must be revealed to consumers. Part III analyzes how states define the data breach itself, particularly whether states rely on a strict liability standard, on a risk assessment approach, or on a model that blends elements of both in determining how and when companies have to notify consumers of a breach. Part IV discusses the time limits companies face, penalties for non-compliance, litigation under the statutes, and state enforcement of the statutes. Finally, Part V presents specific recommendations for the state legislatures and enforcement agencies and for Congress, as well as for companies facing data breaches.”

Christopher Kuner

“Transborder data flows have become increasingly important in economic, political, and social terms over the thirty years since adoption in 1980 of the OECD Guidelines on the Protection of Privacy and Transborder Flows of Personal Data. Data protection and privacy legislation often regulates the movement of personal data across national borders. A fundamental change in the business and technological environment for data processing is also taking place, driven by developments such as the increased globalisation of the world economy; the growing economic importance of data processing; the ubiquity of data transfers over the Internet; greater direct involvement of individuals in transborder data flows; the changing role of geography; and growing risks to the privacy of individuals. Despite these fundamental changes in the data processing landscape, and the growth in the regulation of transborder data flows in numerous countries, there has been little attempt so far to conduct a systematic inventory of such regulation at a global level; to examine the policies underlying it; and to consider whether those policies need to be re-evaluated. This study is designed to describe the present status of transborder data flow regulation, and to provoke reflection about its aims, operation, and effectiveness, now and in the future. An Annex lists data protection and privacy law instruments from around the world regulating transborder data flows.”

Scott R. Peppet

“Information technologies are reducing the costs of credible signaling, just as they have reduced the costs of data mining and economic sorting. The burgeoning informational privacy field has ignored this evolution, leaving it unprepared to deal with the consequences of these new signaling mechanisms. In an economy with robust signaling, those with valuable credentials, clean medical records, and impressive credit scores will want to disclose those traits to receive preferential economic treatment. Others may then find that they must also disclose private information to avoid the negative inferences attached to staying silent. This unraveling effect creates new types of privacy harms, converting disclosure from a consensual to a more coerced decision. This Article argues that informational privacy law must focus on the economics of signaling and its unraveling of privacy.”

Philip A. Wells

“Invasive law enforcement tactics, including Internet surveillance, are costly, oppressive, and foster a dangerous disrespect for the law. Instead, this paper proposes harnessing an urban-analog perspective to establish more intimate social norms on websites. Through user registration, structural transparency, opt-in disclosures, and visitor-to-visitor communication, websites can effectively become Internet “villages,” capable of fostering social norms that organically normalize online interaction and discourage antisocial behavior. In this context, law enforcement should pay heed to the self-policing within these “villages” and abandon a “one-size fits all” invasive approach to the Internet. Instead, law enforcement should focus its finite resources on amplifying these social norms wherever possible and avoid costly and intrusive measures. In doing so, the urban-analog perspective will efficiently enhance existing law enforcement priorities and avoid an undesirable trade-off between freedom and security on the Internet.”

Net Neutrality

Inimai Chettiar , James Scott Holladay

“In Free to Invest, the Institute for Policy Integrity warns of negative economic consequences if net neutrality is weakened. The report arrived at five main findings that describe the trade-offs of revoking net neutrality.”

Sulan Wong, Julio Rojas-Mora, Eitan Altman

“The evolution of the Internet has come to a point where almost at the same time, governments all around the world feel the need for legislation to regulate the use of the Internet. In preparing the legislation, consultations were called by various governments or by the corresponding regulation bodies. We describe in this paper the various consultations as well as the background related to the Net Neutrality question in each case. Rather than describing the answers to each consultation, which are available and which have already been analyzed, we focus on comparing the consultations and the statistical figures related to the participation in them.”

Economics of the Internet

Erik Brynjolfsson, Yu Jeffrey Hu, Michael D. Smith

“Internet consumers derive significant surplus from increased product variety, and in particular, the “Long Tail” of niche products that can be found on the Internet at retailers like Amazon.com. In this paper we analyze how the shape of Amazon’s sales distribution curve has changed from 2000 to 2008, and how this impacts the resulting consumer surplus gains from increased product variety in the online book market. Specifically, in 2008 we collected sales and sales rank data on a broad sample of books sold through Amazon.com and compare it to similar data we gathered in 2000. We then develop a new methodology for fitting the relationship between sales and sales rank and apply it to our data. We find that the Long Tail has grown longer over time, with niche books accounting for a larger share of total sales. Our analyses suggest that by 2008, niche books account for 36.7% of Amazon’s sales and the consumer surplus generated by niche books has increased at least five fold from 2000 to 2008. We argue that this increase is consistent with the presence of “secondary” supply- and demand- side effects driving the growth of the Long Tail online. In addition, our new methodology finds that, while power laws are a good first approximation for the rank-sales relationship, the slope is not constant for all book ranks, becoming progressively steeper for more obscure books.”

Matthew J. Hashim, Zhulei Tang

“There is uncertainty in the electronic commerce domain as to whether the new product development of a technology-enabled good impacts the sale of its physical counterpart. We address this issue empirically from the perspective of the effect of Amazon’s new digital products on their physical DVD movie sales. Data are collected from Amazon and Barnes and Noble on the same day for every observation in our sample to control our results. The digital purchase format has no overall effect on DVD sales while the digital rental format significantly reduces the sales of physical DVD movies. This suggests a cannibalization effect where consumers are trading off the purchase of a DVD for a time-limited and less expensive rental of the same movie. Cannibalization is greatest for popular movies that are new releases, have few customer reviews, and are relatively expensive. These results suggest that customers are driven by a desire for low-risk sampling of a movie. Amazon appears to favor innovation and a transfer of market share to new digital products over the risk of cannibalization in their new product development strategy.”

Andrea Renda

“The public policy approach to the Internet has become more and more complex as several markets – including fixed and mobile communications, media and content, IT – converge into one single Internet ecosystem. As in all ecosystems, zones and domains depend on each other, and there is no possibility of touching one layer without affecting all others. This paper reflects on the economics of the Internet and emerging business models, and comments on the current debates in each of the layers of modern all-IP architectures, from the unbundling of network elements to net neutrality and the emerging discussion on search neutrality. The paper concludes that the trend towards ex ante regulation of several Internet services, if not stopped, may extend also to sectors that are still in their infancy, such as cloud computing. Finally, the paper suggests that antitrust laws and current regulatory frameworks for e-communications, in particular in Europe, should reflect the economics of all-IP broadband platforms. This implies, i.a., strengthening the role of countervailing buyer power across layers of the Internet, adopting a layered approach to policymaking and establishing co-regulatory solutions to bridge the informational gap between policymakers and market players.”

Energy

Thomas P. Tangerås

“The capacity of the transmission network determines the extent of integration of a multi-national energy market. Cross-border externalities render coordination of network capacity valuable. Is it then optimal to collect powers in the hands of a single regulator? Should a common system operator manage the entire network? I show that optimal network structure depends on (i) how the common regulator would balance the interests of the different member states; (ii) how the gains from market integration vary across countries; (iii) network characteristics (substitutability versus complementarity); and (iv) the social cost of operator rent.”

Sven-Olof Fridolfsson, Thomas Tangerås

“We review the recent empirical research concerning market power on the Nordic wholesale market for electricity, Nord Pool. There is no evidence of blatant and systematic exploitation of system level market power on Nord Pool. However, generation companies seem from time to time able to take advantage of capacity constraints in transmission to wield regional market power. Market power can manifest itself in a number of ways which have so far escaped empirical scrutiny. We discuss investment incentives, vertical integration and buyer power, as well as withholding of base-load (nuclear) capacity.”

Internet Governance

Laura DeNardis

“This paper presents a taxonomy for understanding current themes and controversies in Internet governance, presents a canon of interdisciplinary Internet governance scholarship, and identifies some emerging issues that present a moment of opportunity for new research. The following are the current themes this paper describes: critical Internet resources; Internet protocols; Internet governance-related intellectual property rights; Internet security and infrastructure management; and communication rights. Areas in need of additional research involves the increasing privatization of Internet governance, particularly at the level of infrastructure management. Recommended areas for additional study include: 1) private sector backbone peering agreements at Internet exchange points (IXPs); 2) network management via deep packet inspection; and 3) the increasing use of trade secrecy laws in information intermediation.”

Intellectual Property

Pamela Samuelson

“An intriguing way to view the proposed settlement of the copyright litigation over the Google Book Search (GBS) Project is as a mechanism through which to achieve copyright reform that Congress has not yet and may never be willing to do. The settlement would, in effect, give Google a compulsory license to commercialize millions of out-of-print books, including those that are “orphans” (that is, books whose rights holders cannot readily be located), establish a revenue-sharing arrangement as to these books, authorize the creation of an institutional subscription database that would be licensed to libraries and other entities, resolve disputes between authors and publishers over who owns copyrights in electronic versions of their books, provide a safe harbor for Google for any mistakes it might make in good faith as to whether books are in the public domain or in-copyright, and immunize libraries from secondary liability for providing books to Google for GBS, among other things. This Article explains why certain features of U.S. law, particularly copyright law, may have contributed to Google’s willingness to undertake the GBS project in the first place and later to its motivation to settle the Authors Guild lawsuit. It then demonstrates that the proposed settlement would indeed achieve a measure of copyright reform that Congress would find difficult to accomplish. Some of this reform may be in the public interest. It also considers whether the quasi-legislative nature of the GBS settlement is merely an interesting side effect of the agreement or an additional reason in favor or against approval of this settlement.”

Robert J. Tomkowicz

“This paper examines the duty of disclosure in patent law and discusses the potential insufficiency of disclosing a computer program’s functionality in patent applications for certain categories of software – applications working on closed platforms. In Canada, software patents are generally issued without disclosure of the software source code. Present examination of disclosure in software patent applications focuses solely on the ability of computer programmers to write software based on its functional description, which raises profound questions about sufficiency of disclosure in those applications. The problem of insufficient disclosure in software patent applications poses serious questions about the validity of a number of software patents already granted and should be resolved without delay. This paper recommends broader examination of software patent applications by ensuring that the software’s disclosure is sufficient to replicate the software’s functionality in the environment in which it functions during patent monopoly. Such analysis will often lead to a conclusion requiring disclosure of the software source code in patent applications.”

Wireless and Spectrum

Christos Genakos, Tommaso M. Valletti

“Interconnection rates are a key variable in telecommunications markets. Every call that is placed must be terminated by the network of the receiving party, thus the termination end has the characteristic of an economic bottleneck and is subject to regulation in many countries. This paper examines the impact of regulatory intervention to cut termination rates of calls to mobile phones. We argue that regulatory cuts should have a differential impact according to the type of tariff the mobile customer subscribes to. While all mobile customers may suffer because of a “waterbed” effect, termination rates also affect competition among mobile operators. We show that the waterbed effect is diluted, but not eliminated, for customers with pre-paid cards, where regulation also acts as impediment to “raise-each-other’s-cost” collusive strategies that mobile networks can adopt. The waterbed effect is instead strongest for consumers with post-paid subscription contracts.”

Ignacio Mas, Daniel Radcliffe

Retail payment systems require scale to get off the ground and struggle to grow incrementally, as they need to build trust, reap network effects and overcome chicken-and-egg problems of acquiring both customers and merchants. To overcome these barriers, they must (i) create enough urgency in customers’ minds to learn about, try, and use the service; (ii) invest heavily in above- and below-the-line marketing to establish top-of-mind awareness of (and trust in) the service among a large segment of the population; and (iii) incur considerable customer acquisition costs (beyond marketing and promotion) to ensure that their cash-in/out merchants are adequately incentivized to promote the service. Many deployments around the world have potential to scale, but are stuck in the ‘sub-scale trap’ due to under-resourcing.

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